A Simple Decision Market Model

Abstract

Economic modeling of decision markets has mainly considered the market scoring rule setup. Literature has made reference to the alternative, joint elicitation type decision market, but no in depth analysis of it appears to have been published. This paper develops a simple decision market model of the joint elicitation type, that provides a specific decision market nomenclature on which to base future analysis. A generally accepted prediction market model is modified, by introducing two additional concepts: “proper information market” and “relevant information”. Our work then provides original contributions to the theoretical discourse on information markets, including finding the sufficient and necessary condition for convergence to the best possible prediction. It is shown in our new prediction market model that “all agents express relevant information” is a sufficient and necessary condition for convergence to the direct communication equilibrium in a proper information (prediction) market. Our new prediction market model is used to formulate a simple decision market model of the joint elicitation market type. It is shown that our decision market will select the best decision if a specific selection and payout rule is defined. Importantly, our decision market model does not need to delay payment of any contracts to the observation of the desired outcome. Therefore, when dealing with long-term outcome projects, our decision market does not need to be a long running market. Future work will test for the statistical significance of relevant information (identified as important in our idealized decision market model) in laboratory and real world settings.